Income Statements under Absorption and Variable Costing Shaw

Income Statements under Absorption and Variable Costing

Shawnee Motors Inc. assembles and sells MP3 players. The company began operations on August 1 and operated at 100% of capacity during the first month. The following data summarize the results for August:

If required, round interim per-unit calculations to the nearest cent.

a. Prepare an income statement according to the absorption costing concept.

b. Prepare an income statement according to the variable costing concept.

c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the (Absorption cost/Varible cost?) method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under (Absorption cost/Variable cost?) , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory increases, the (Absorption cost/Variable cost?) income statement will have a higher income from operations than will the variable costing income statement.

Sales (17,500 units)		$2,100,000
Production costs (23,000 units):
Direct materials	$1,021,200
Direct labor	489,900
Variable factory overhead	246,100
Fixed factory overhead	163,300		1,920,500
Selling and administrative expenses:
Variable selling and administrative expenses	$297,700
Fixed selling and administrative expenses	115,200		412,900

Solution

A) unit product cost under Absorption Costing $ Direct materials (1,021,200/23000) 44.4 Direct labor (489900/23000) 21.3 Variable factory overhead (246100/23000) 10.7 fixed factory overhead (21600/2,400) (163,300/23000) 7.1 unit product cost under Absorption costing 83.5 Income statement under Absorption costing Sales 2,100,000 less cost of good sold (17500*83.5) 1461250 Gross profit 638,750 less:Selling & adm expense 412,900 Net income 225,850 B) unit product cost under variable costing $ Direct materials 44.4 Direct labor 21.3 Variable factory overhead 10.7 unit product cost 76.4 income statement under Variable costing Sales 2,100,000 less Variable expense variable cost of goods sold (17500*76.4) 1337000 Variable selling & administrative expense 297,700 Contribution margin 465,300 Fixed expense fixed manufacturing overhead 163,300 fixed selling & adm expense 115,200 278,500 net income 186,800 c) Variable Absorption Absorption